EMC has announced 2013 earnings.
Complete detail can be found at http://www.emc.com/corporate/investor-relations/index.htm
This post will discuss our thoughts on IIG’s Financial Performance in comparison to the rest of EMC.
IIG 2013 – Numbers and Earnings Call
2013 EMC Consolidated Revenue – 23,222 Million – IIG Component – 647 Million (2.7%)
IIG 2012 Revenue – 640 Million – up 1% to 647 Million in 2013
IIG 2012 Services Revenue – 440 Million – up 4% to 467 Million in 2013
IIG 2012 Product Revenue – 200 Million – down 10% to 180 Million in 2013
Additional quarter information is available but it appears that most of the product sales loss was in the 3rd quarter where revenue was down 18 Million or 36% compared to the previous 3rd quarter. Services continue to grow quarter after quarter.
From the earnings call, there was only one small paragraph on IIG:
Our Information Intelligence group grew 3% in Q4, driving positive growth for the full year. Our new vertical content solutions plus xCP and Syncplicity accounted for about 40% of IIG’s license bookings in Q4, and these bookings grew approximately 50% year-on-year. IIG continue to innovate to meet customers’ demand for technologies that work seamlessly in mobile cloud environments and we feel good about this transition to these newer solution sets.
Complete transcript is available below:
Documentum/IIG Performance – More services (less product)
As we pointed out in our first quarter 2013 review, as well as our review at EMC World, we see Documentum/IIG continuing to push into vertical content solutions with a combined product/services play, particularly to their existing client base.
Service Revenue has continued to grow at a steady pace over the last 2 years and we would anticipate it continuing to grow. Product revenue was declining in 1st, 2nd and 3rd quarters but 4th quarter rebounded being just slightly lower than fourth quarter in 2012. As we have mentioned before, 1st quarter is typically a difficult quarter for Documentum/IIG as a year-end push can leave the pipeline dry for 1st quarter.
Some telling statistics when comparing to overall EMC
- IIG Product Revenue is 1.3% of EMC’s Overall Product Revenue
- IIG Service Revenue is 4.8% of EMC’s Overall Service Revenue
- IIG Total Revenue is 2.8% of overall EMC Revenue
- IIG Total Revenue is 8 times smaller than the VMWare
IIG can sometimes be saddled with the moniker of “worst performing division at EMC” but, keep in mind that EMC is an incredibly well performing company. Of the “four horsemen of the Internet (Sun, Intel, Cisco and EMC)” – EMC has done incredibly well.
Profit over Revenue
As we have said over the past years, EMC isn’t particularly concerned about a division that is less than 3% of overall revenue as long as it is profitable. Unfortunately we don’t get financial information on net income for the different divisions but I would predict that net income has risen for IIG over the last two years. With revenues remaining stable, net income would increase by reducing expenditures. Expenditures could include:
- R&D Expenditures – Either less R&D or more cost efficient R&D (by outsourcing to cheaper developers)
- Support Expenditures– Either less support costs or outsource
- Sales Expenditures – reduced commissions
Given the above, the vertical product solutions make sense. Rather than trying to build brand new products, Documentum/IIG are packaging existing products (xCP, D2…) into specific solutions for industries. In order to implement the solutions, consulting resources from IIG are often needed or a bundled amount of services are added to the cost of the solution. We noticed this at EMC World where the significant keynote announcement was a migration tool that is only available with IIG Consulting purchases.
The Services/Solution Play – the IBM pivot
As we mentioned in the first quarter, one significant news event that went mostly unnoticed at the end of 2012 was IIG’s purchase of Trinity. We see it as a significant change in Documentum’s focus on product versus service. With ECM moving to more of a commodity based on pressure from more-cost efficient options like Alfresco or SharePoint as well as free collaboration alternatives like DropBox and the host of others, software firms with high prices are struggling and do not get the valuation they used to 10 years ago. Many are pivoting to quickly add services to focus on consulting similar to IBM’s move in the 90s.
Software Company Growth – the Microsoft Dilemma
The tough part of being a software company is moving from the growth stage to a maturity. In order to attract the best talent and new customers, software companies like to be “hot” and growth adds excitement. Documentum/IIG has grown to have a solid market in ECM but, as ECM matures, Documentum/IIG will most likely struggle as:
- New competitors have cheaper price models as they are fighting for market share from Documentum/IIG
- Documentum/IIG has a high price model as they have raised prices over time to continue to grow revenue without new customers
Like Microsoft, Documentum/IIG has tried to add tools like Syncplicity to compete with the new entrants (Dropbox, Box.net) but typically struggle with how to position the new products. This compares with Microsoft, with a large client base for Windows and Office, continuing to push with Surface and Microsoft Phones but making little headway.
With an eroding market share (we have heard Documentum/IIG is losing around 4% of customers per year), it makes sense that Documentum would offer additional products and services to their existing customers as well as try to provide more of a solution play to bring in new customers.
Overall IIG/Documentum results are not bad but it is a very small component of EMC’s overall revenue. IIG needs to remain profitable as revenue growth will be difficult. We would not predict significant investments but would expect continued services/solution practice development similar to IBM’s approach.
Regarding whether or not EMC would sell IIG, with Joe Tucci still in charge of EMC, we predict it unlikely that EMC would sell off the IIG division. Joe Tucci was the at the helm of EMC when Documentum was purchased and would not want that decision viewed negatively with a sale given the small impact on the overall company.
Let us know your thoughts below.